Capital Supply Channel through Venture Capitals: Evidence from matched data

This paper examines the impact of venture capital firms' (VCs) characteristics on their capital (i.e., fund) supply and how such an impact interacts with the dynamics of public equity markets. To this end, we use a unique dataset consisting of around 6,000 pairs of venture companies and VCs match-level dataset in Japan, which covers around 2,600 unlisted companies and 600 VCs. This match-level panel dataset allows us to control for companies' time-varying unobservable capital demand, so that we can identify the effects of VCs' characteristics on their capital supply and how such effects vary as public equity markets fluctuate. The estimation results indicate that VCs with larger past investment experiences tend to supply more capital to their portfolio companies. Furthermore, such positive impact of VCs' experience on the capital supply became larger (smaller) when public equity markets were in their downturn (upturn). We also confirm that omitting firms' fund demand leads to substantial overestimation of these impacts.